The Lasting Impact of 9/11

Remember September 11. New York City Manhattan panorama view at night with office building skyscrapers skyline illuminated over Hudson River and two light beam in memory of September 11. Ever since that horrific day in 2001, nearly 14 years ago, we have seen an increase in the use of the calendar to create and enhance awareness of our pet projects or concerns. Star Wars fans adopted May 4th, as in “May the fourth be with you!”

Not to be outdone, college investment providers adopted the date May 29th to promote Section 529 plans which are, in my opinion, a great tool for accumulating assets to help provide for future advanced-education expenses.

Here are a few advantages of a 529 plan:

1. The donor/owner retains control over the assets, even though they are removed from their own estate for estate tax purposes;

2. The beneficiary can be changed at any time to other family members as distant as first cousins from the original beneficiary;

3. There are compelling income tax advantages for investments within the plans, especially if the funds are used for qualified education expenses;

4. Funding/contributions are incredibly flexible, with plans allowing as little as $25 a month and maximums as high as $70,000 in a single year without incurring gift tax1.

Section 529 plans are intended to be “self–managed”. The underlying investments choices are generally limited to a selection of mutual funds, similar to the way a 401k offers an investment selection of funds. Most if not all have an investment option selection based upon the age of the beneficiary.

Younger beneficiaries have more time before needing the funds. They have a long “time horizon” and should take more risk. Their portfolio will be largely equities.

As a beneficiary approaches the age of needing the funds, the investment mix is allocated to more conservative ratios heavy in fixed income. The rate or methodology used for making these transitions is called a “glide path”, and it serves as a major differentiator between the various plans providers.

While most of the accounts we see use the “age-based” or glide-path investment option, each plan sponsor has their own investment management strengths and most offer individual investment options that can be used to tailor the investment approach. Account owners are allowed to change the account investments only twice a year. These plans are not intended to be “actively managed”.

In addition to their investment management differences, each plan must be sponsored by a specific state. The state plans differ on issues like:

– tax deductibility of contributions: some states allow an income tax deduction;

– creditor protection: one state has almost impenetrable bankruptcy protection;

– maximum account sizes: new contributions are limited once the account value exceeds the amount that each state determines is “the amount necessary to provide for the qualified education expenses of the beneficiary”2

Computers are still DENIED as a “qualified education expense” unless required by the school for enrollment or attendance. At first blush, this seems ludicrous, as no one would consider going to college without one. But the truth is that these funds can be used for any postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. So it includes vocational or trade schools, like schools for mechanics, technicians and professional golfers.

The important thing to remember when selecting a plan for your contributions is that you can select any plan from any state if it meets your needs, regardless of where you or the beneficiary happens to reside.

529 plans may not be right for everyone. They charge various fees and expenses for the investment management and administration of the account. Non-qualified withdrawals could be subject to income tax and a 10% penalty on the earnings portion of the withdrawal. There is no guarantee your return and the investments are subject to risk, they can lose money.

There are several online sites3 which can help guide you to an understanding of the various plans, or you can contact us and we can help you set up the plan we feel the best meets your needs.

1According to, “Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary.” The $70,000 contribution represents 5 years of gifting in a single year and may preclude you from making contributions without gift tax consequences to the plan for the next 5 years. The gift tax exclusion amount for 2015 is $14,000. For tax advice, please consult your tax advisor.


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